In 2014, John Oliphant was fired from the Government Employees’ Pension Fund (GEPF) where he was principal executive officer. There were allegations, some details not disputed, that had Mr Oliphant accused of exceeding his powers and not following due process which amounted to, at the maximum, some hundreds of thousands of Rands.
That outcome, with those modest numbers, especially with the murk that surrounded the allegations, contrasts markedly with the hundreds of millions of Rands known to be deeply mired in scandal at the moment without consequence.
The GEPF and the Public Investment Corporation (the PIC, which investments money on behalf of many state entities) are proximate with huge amounts of money. It could be expected to be an attractive target for those with sticky fingers and connections. So when stories emerge of PIC directing GEPF investments towards SOEs or other private investments for merits other than the investment returns for the fund, nobody is surprised but plenty are concerned.
Most of the stories in the press on this matter are misinformed. The claims that pensioners’ money is at risk are misleading at best. One exception is the Daily Maverick article by Dirk De Vos. In this article, De Vos explains why tax payers rather than (only) government pensioners will bear the burden of failed investments for the GEPF.
In some ways this is the perfect Fellowship exam question for the pensions exams. Who really bears the burden of failed defined benefit pension funds? Who owns Defined Benefit holes?
In some ways, a defined benefit (DB) pension fund (one where the pension benefits are defined or described by the rules of the fund and implicitly or explicitly in employment contracts) is a separate legal entity with its own assets and liabilities.
In every real sense it is not.
It is an extension of the balance sheet of the sponsoring employer. Accounting standard IAS19 recognises this and requires the sponsoring employer to hold a liability for any shortfall of the funding within the fund. Economic valuations, very much including those as part of M&A work, look closely at DB obligations and funding levels because it is a real cost to shareholders. Except in cases of sponsor insolvency (where there literally isn’t money to make good promises to pensioners), the company will be on the hook to make good promises to pensioners.
In the case of the GEPF, the sponsoring employer is the state. Two key things emerge here:
- The state has very little chance of claiming insolvency and an inability to make good on promises to pensioners (also, see Greece)
- Our government has limited history of making unpopular decisions, as not paying increases to pensioners at least in line with inflation would likely be.
Now, it is possible that increases to pensioners could legally be made below inflation, which would decrease deficits in the fund compared to a liability valuation basis that hopefully allows for inflationary increases. However, (more lists I’m afraid) there are several factors at play:
- Pensioners are rather large in number and have the ability to vote, or at least note vote (relevant in the South African context where voter turnout is a measure of support)
- Even if pensioners don’t have much in the way of mobilisation clout, active members (current state employees) will clearly see an attack on pension increases as a future attack on their very own pension increases. They do have the ability to mobilise. Trade Unions are no longer the dependable ally of government (an unusual historical arrangement by international standards anyway)
- The fund rules require a minimum of 75% of inflation increases in any case. So the actual fund-rule-compliant reduction possible is dramatically weakened.
Oh, another way to decrease fund liabilities would be to not pay salary increases to current employees, thus lowering their future pension benefits. Let me know how that works out.
The reality is that government is not in a position to offset investment losses against pension benefits. They could put pressure on the valuation actuaries (let’s call that a prediction shall we) or they could allow the funding level to call back below 100%, which over time would require additional injections.
Did I mention that government pension shortfalls don’t usually count towards direct measures of public debt? So expect to see a deteriorating funding level for a long time before you see an actual injection of capital. But don’t be fooled, the impact is the same, just the measures differ.
So, to answer the question, who owns future holes in the GEPF balance sheet?